Corporate Strategy and the Balanced Scorecard
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Every enterprise finds itself in the position of facing and interacting with the environment that it is surrounded by. Enterprise has to outline the corporation’s identity in its relationships with the outside: more specifically, it consists of the special entrepreneurial formula i.e. it is how the company specifically responds to the manifold expectations/needs of the various parties that it interacts with.
In this chapter, we describe the formation process leading to corporate strategy and the role of the Balanced scorecard in strategy management by exploring the relationship between the Balanced scorecard and the four main engines of strategy management: (1) the strategy control loop, (2) the strategic intent formation loop, (3) the entrepreneurial and innovation loop and (4) the value, aspiration and attitude review loop (in brief, the “mental models”) of the top management.
KeywordsCorporate strategy Strategy formation Intentional strategy Deliberate strategy Realised strategy Emergent strategy Strategy review loops Strategic control
3.1 Processes leading to Corporate Strategy
In the pursuit of success, every enterprise has constantly got to become acquainted with and face its adversaries, by either defending itself – for example with similar changes in the offer of products/services – or attacking, for example with customer services that feature a unique ability to personalise products. In the pursuit of success, every enterprise looks for contributions and consensus from that set of social parties (employees, financiers, public administrators, etc.) who offer the enterprise the resources that it needs to survive and develop.
Every enterprise hence finds itself in the position of facing and interacting with the environment that it is surrounded by. A strategy defines the enterprise-environment relationship, that is it outlines the corporation’s identity in its relationships with the outside: more specifically, it consists of the special entrepreneurial formula (Coda and Mollona 2006) that the enterprise has developed over time while pursuing a certain idea of success and establishing a specific interaction model with the environment. The environment that an enterprise operates in consists of an intricate set of interlocutors that it interacts with: namely, competitors, suppliers, customers, banks, public administrators and officials, employment seekers, employees, trade union representatives, top managers, etc. This set of interlocutors can be divided into two distinct groups: one group composed of the parties ailing from the competitive world, and the other group composed of the social parties that represent those who “hold an interest and have expectations that stem from the supply of labour resources, financial resources, consensus and various contributions that a firm needs to operate” (Coda and Mollona 2006). The competitive environment consists of the network of business relationships generated by competitors, suppliers and customers (i.e. the purchasers). The social parties consist of employees, managers, shareholders, banks and financial institutions, trade union representatives, national and local stakeholders (public administrators and officials, citizens).
The competitive environment where it is located (who are my competitors, customers and suppliers?);
The “product system” that the enterprise presents to the competitive world, that is: the material specifications of its products, the number of offered alternatives/options, the non-material elements connected with them (such as prestige, elegance, etc.), customer assistance, the economic conditions of the exchange (prices, forms of payment, insurances, etc.);
The project proposals that the enterprise (whether explicitly or not) offers its social parties, with potential rewards and asking for specific contributions or consensus;
The company’s internal characteristics that define its “structure” (through which a certain product system is offered to the market and through which the competitive and social environment is tackled); the term “structure,” in compliance with what Coda and Mollona stated (2006), is hereby used in a broad sense of the term that, not only includes the organisational structure and the operational mechanisms (such as planning and control mechanisms, individual performance evaluation mechanisms, etc.), but also all the resources – both human and non-human ones – which constitute the technological, commercial, managerial and economic-financial assets of the enterprise.
As has been mentioned in the previous chapters, the strategic choices that lead an enterprise to use a certain entrepreneurial formula may be either rationally planned or creatively “improvised.” The goal of this chapter is, on the one hand, to further discuss this statement by exploring the characteristics of the processes through which a company’s strategy is formed; and, on the other hand, to highlight the role of the BSC in such processes.
Deliberate strategy: the component of the intentional strategy (goals and plans for the future are deliberately set up and made explicit) that has been realised;
Emergent strategy: a combination of actions that, because of their coherence, indicate a “strategy” in the decision-making processes; this strategy though is not deliberated beforehand, but gradually emerges over time.
The importance of acknowledging the existence of a strategy’s emerging component is rather well illustrated by the exemplary case of Honda, as it entered the US market. Honda (which back then was only a producer of motorcycles) entered the US motorcycle market – dominated by Harley-Davidson, BSA, Triumph, Norton and Moto Guzzi – in 1959; 7 years after its entry, Honda had captured 63% of the entire market share
At the beginning, the story of Honda’s success was seen as an example of perfect realisation of an accurate expansion strategy. The report of the Boston Consulting Group (commissioned in 1975 by the British government to understand the causes of the decline of its motorcycle industry and to find possible strategic solutions) described Japanese manufacturers, and especially their leader Honda, in these terms: “the success of the Japanese motorcycle manufacturers originated with the growth of their domestic market during the 1950s. By 1960 they had developed huge production volumes in small motorcycles in their domestic market and volume-related cost reductions had followed. This resulted in a highly competitive cost position which the Japanese used as a springboard for penetration of world markets with small motorcycles in the early 1960s.” Honda was seen as a company that had sought a high scale of production at low costs and had used its dominant position in Japan to enter the US market by expanding the market and creating the segment of “small motorcycles that normal everyday people rode” (prior to Honda’s entering the market, the US market was entirely dominated by big motorcycles and the biker’s stereotype was that of a young leather-clad outlaw), and exploiting its cost competitive advantage through aggressive pricing and intensive marketing campaigns.
According to the BCG, the story of Honda’s success is the story of a brilliant intentional strategy made perfectly capable in the deliberate strategy. Things actually did not go that way. In 1982, Richard Pascale – a consultant and renowned expert of the “Japanese phenomenon” – extensively interviewed the six Honda executives who had been responsible for the firm’s entry into the US market: As opposed to the linear and rational explanation that the BCG had provided, the story actually brought attention to certain other aspects. Initially, Soichiro Honda (the founder) had been sure that the biggest chance for success in the American market would come with 250cc and 305cc motorcycles; however, a decision was made to set the start-up warehouse in California with 25% of each of these four products: 50cc Supercubs, 125cc, 250cc and 305cc bikes. “We were entirely in the dark the first year. We were not aware that the motorcycle business in the United States occurs during a seasonable April-to-August – and that our timing coincided with the closing of the 1959 season. […] By spring 1960, we had 40 dealers and some of our inventory in their stores – mostly larger bikes. A few of the 250cc and 305cc began to sell. Then disaster struck. By the first week of April 1960, reports were coming in that our machines were leaking oil and encountering clutch failure. This was our lowest moment. Honda’s fragile reputation was being destroyed before it could be established. As it turned out, motorcycles in the United States are driven much farther and much faster than in Japan. We dug deeply into our precious cash reserves to air freight our motorcycles to the Honda testing lab in Japan. […] Within a month, a redesigned head gasket and clutch spring solved the problem. In the meantime, events had taken a surprising turn. Throughout our first 8 months, following Mr. Honda’s and our own instincts, we had not attempted to move the 50cc Supercubs. While they were a smash success in Japan […], they seemed wholly unsuitable for the U.S. market where everything was bigger and more luxurious. […] We used the Honda 1950s ourselves to ride around Los Angeles on errands. They attracted a lot of attention. One day we had a call from a Sears buyer. While persisting in our refusal to sell through an intermediary, we took note of Sears’ interest. But we still hesitated to push the 50cc bikes out of fear they might harm our image in a heavily macho market. But when the larger bikes started breaking, we had no choice. We let the 50cc bikes move. And surprisingly, the retailers who wanted to sell them weren’t motorcycle dealers; they were sporting goods stores.” (Pascale 1984). From that moment on, the Honda’s American team further promoted the 50cc bikes and in 1963 they launched the famous advertising campaign “You Meet the Nicest People on a Honda” that directly identified and attacked an enormous and never-before tapped market segment.
The story of Honda in the USA shows that its success “did not result from a bold insight by a few big brains at the top. On the contrary, success was achieved by senior managers humble enough not to take their initial strategic positions too seriously…” (Pascale 1984); they were open to learn from mistakes and unforeseen events; there was room for an emerging strategy to form.
The model shows how the formation process to strategy consists of four main loops or “engines” of strategy management: (1) the strategy control loop, (2) the strategic intent formation loop, (3) the entrepreneurial and innovation loop and (4) the value, aspiration and attitude review loop (in brief, the “mental models”) of the top management. Coda and Mollona described the four loops as follows: “via loop 1 the realisation of intentional strategy is controlled. Once intentional strategies have been modelled, and possibly articulated into strategic plans, the resulting realisation processes are oriented towards reducing the gap between strategic intents and realised strategy. […] The strategic control loop describes a company’s ability to execute a certain strategy promptly and efficaciously. […] Loop 2 represents the process whose protagonists are the top-managers who draw useful indications from the realised strategy in order to re-examine and adjust strategic intents. […] The process represented in loop 4 highlights the impact of analysis of past strategic action on top management learning. Compared with the mechanism described in loop 2, the learning process shown in loop 4 goes to greater depth because it changes management’s mental patterns, i.e. it goes to the roots of strategic intent. […] The third loop describes the bottom-up innovation processes, which are the expression of internal entrepreneurship (in the case of strategic innovations) or simply of empowering projects aiming to generate operational innovations that will lead to incremented productivity. Loop 3 consists of a series of elements. The process pivots on a stock variable: the strategic and operational initiatives; the latter describe the results of the sub-processes which, positioned upstream and downstream of the stock, modify its level. The choice of a stock variable of strategic and operational initiatives is the answer to a precise research question: at a certain moment in time, what describes the energies, tensions and resources that are working to create innovation in the strategy or operational reality of a company? For example, the patents owned by a company represent the results of innovative initiatives after the latter have been selected, funded and developed, and have become part of the realised strategy. On the other hand, a company’s ideas and projects, in support of which resources and energies have not yet been added, indicate the richness and cultural fertility of a certain organisational context and are therefore elements of the realised strategy, although they do not yet constitute actual ‘initiatives.’ By representing the strategic and operational initiative variable, an attempt is made to ‘photograph’ the intermediate moment in time when the stimuli and incentives present in the organisational context have taken shape and are combined into initiatives, which have nevertheless not yet changed the strategic-organisational context and are still in a developmental phase. This photograph makes it possible to observe the processes upstream and downstream of the stock of strategic and operational initiatives. Upstream, the initiative generation processes, which take place in the strategic-organisational context, feed the stock of strategic and operational initiatives; downstream, the selection and realisation processes, by means of which the single initiatives are assessed and funded, empty out the stock of initiatives since, once selected and realised, single initiatives help modify realised strategy and become an integral part of it. In this way, realised initiatives define the cultural environment in which the subsequent initiatives will be conceived” (Coda and Mollona 2006).
In light of the above, it becomes clear that the effectiveness of strategy management is linked to the good coordination and fusion of the four engines. It is especially important to point out that there is balance between engines 1-2-4 and engine 3. The first group of loops refers to the ability of the top management to imagine a clear direction for the enterprise to follow, to initiate the adequate actions that will guide the enterprise toward the desired direction and to assess and re-define their strategic intents; the operation of engine 3 makes it possible to mould the strategy from the bottom.
Strategy management without engine 3 would make the business system slightly more rigid, less adaptive and less swift in perceiving the changes occurring in the environment and in elaborating adequate responses. On the contrary, exclusively focusing upon engine 3 could lead to a waste of energy: with greater freedom of action there is a risk of having chaos-induced reactions to pressures happening at that moment, and a risk of adopting initiatives that go toward non-correlated and synergy-lacking initiatives. The idea of balance within the “engines” shows rather well that strategy management is an elaborate mix of rationalisation and improvisation; of planning and learning-based adaptability; of clarity in strategic intents and freedom of experimentation.
What is the role of the BSC in strategy management? The previous chapters outlined an initial answer to the question when we illustrated the “double-loop management” by Kaplan and Norton: the BSC is the central point of two loops: the control loop and the strategic learning loop. The paragraphs to follow will further deal with such concepts by exploring the relationship between the BSC and the four engines of strategy management.
3.2 BSC, Learning Loops and Strategy Review Loops
As has been shown, the establishment of the BSC calls for the identification of critical success factors and a strategy map: in other words, a summary of the points of reference that the desired entrepreneurial formula is built on. Therefore, there is no doubt that the formation and review process of intentional strategy finds, in the BSC, an important support tool. The clarification of critical factors and their linkages in the strategy map promote the functioning of engines 2 and 4, and lead the company to think and clarify its vision of the future; engines 2 and 4 detail the concept of “strategic learning loop” illustrated in the “double-loop management” model by Kaplan and Norton ( Chap. 1).
The BSC does not require a lot of formalisation though, as in the case of another classic tool that supports the definition of intentional strategy – the industrial plan: “the industrial plan is a document that illustrates, in a fundamental and critical manner, the strategic intents of the management with regards to: its competitive strategies at the level of business strategic areas and at the company level; the main expected results at the economic-financial, competitive and sometimes social level; the actions that will follow the strategic intents presented and their linkage to the expected results” (Mazzola 2003). The BSC and the strategy map help show strategic intents, without explaining and planning future actions, but clarifying the points of reference that must be taken into account for future operations.
The BSC hence provides some “light” support to the formation and review of intentional strategies and is thus well suited for small and medium-sized enterprises and, most of all, is in line with the perplexities that have long been surrounding the soundness of formalised strategic planning. Mintzberg (1994) effectively summarised the fallacies connected with an orientation to strategy management that is too attracted to the alleged certainties of medium-to-long-term detailed plans and of formal planning processes; it is interesting to spend a few extra words on two of them: predetermination and detachment. The fallacy of predetermination is related to the conviction that environmental and organisational dynamics can be predicted with some degree of accuracy; however this is only possible in specific conditions – controllability or stability of the environment – which seldom occur. The fallacy of detachment refers to the separation of the plan formulation from the implementation that formal strategic planning processes undertake and actually require. “Imagine someone planning strategy. What likely springs to mind is an image of orderly thinking: a senior manager, or a group of them, sitting in an office formulating courses of action that everyone else will implement on schedule.” The fallacy of detachment manifests itself when we do not acknowledge the fact that strategy formation processes call for the dynamic combination of formulation and implementation, and require learning from experience and “surprises” (remember the Honda effect).
The strategy map and the BSC are hence useful tools for the rationalisation and visualisation of strategic intents and only indirectly act as tools that support the strategy creation processes; they are indirect supports because the identification and visualisation of the critical success factors may lead to critical thinking – as a useful “collateral effect” –over a company’s strategic vision and promote its modification. They are also indirect supports because the formation of intentional strategy is not a structurable process that occurs in pre-set times and places: the tools may help read certain phenomena in a different way, reorganise ideas, focus the strategic vision; such a vision takes shape day by day through an ongoing learning process, during the course of continuous interactions with organisational parties and social interlocutors.
Reduce: which factors should be reduced well below the industry’s standard?
Raise: which factors should be raised well above the industry’s standard?
Eliminate: which of the factors that industry takes for granted should be eliminated?
Create: which factors should be created that industry has never offered?
Creative work on the value curve can then promote the re-definition of the profile of the critical success factors in the customer perspective and, as a result, a re-consideration of the critical factors in the other perspectives of the strategy map and of the BSC.
3.3 BSC, Strategic Control and Entrepreneurship
There is consensus in the statement that the development of a balanced managerial dashboard, such as the Balanced Scorecard, implies the transformation of management control from a “traditional” model – which highlights the economic-financial type of results and neglects the determinants that are at the base of competitive advantage – to a “strategic” model: “management control becomes strategic when it tries to capture strategy, in a sporadic fashion, at the level of choices and actions of operational management, when it systematically calls the managers’ attention back to the strategic consequences of everyday work” (Kaplan and Norton 2001a).
The BSC can efficaciously grease engine 1 of “strategic control” because: (1) the indicators linked to the critical success factors are the foundations for the definition of performance targets and for the selection of possible initiatives and investments; (2) the organisational action is assessed through a set of strategically aligned measures. In addition, using the BSC, as has been stated in the first chapter, requires the planning of a meeting (to take place at least every 3 months) where the causes that determined the current status of critical performances are discussed and the proposed actions to correct the direction of the enterprise are evaluated. Therefore, the use of the BSC brings the attention to management variables of strategic importance, removing the power of the economic-financial dimension from the control activity.
Centring the attention on specific strategic goals, and clearly sharing the understanding of what the “rules of the game” are, has also got an important impact on communication; it defines the context of organisational action. In this perspective, it has a double impact on engine 3. On the one hand, it “contains” the potential centrifugal effect of initiatives that are not coherent with one another, which could lead to a waste of energy: matter of factly, the formation processes of initiatives emerging from the bottom are certainly influenced by how well the top managers understand the aspects and goals that they deem a priority; the strategy map becomes a shared point of reference that provides the framework or grounds where everyone’s creativity can be planted and where improvement actions and innovations can grow and become strategically important. As stated earlier, a “light” point of reference is not a plan to be pursued rigidly; it is not a rigid structure that hinders the freedom of experimentation.
On the other hand, sharing the rules of the game can directly feed the entrepreneurial loop because the initiatives emerging from the bottom are encouraged by the ownership of key performance indicators. Scholarly literature typically focuses upon large enterprises that have departments and multi-national holders, and stresses the importance of aligning people to strategy. Therefore, the direct influence of the BSC on engine 3 is even more important when the dashboard is “deployed” at the level of function or single organisational role. Starting from a company’s BSC, the top organisational units identify the performance measures that are causally connected with the indicators of the company’s level; the organisational units that are below proceed the same way referring themselves to the units above. The overall set of indicators is thus connected via a network of cause-and–effect relationships.
In the case of small-sized enterprises, this deployment process is no doubt redundant; within the company’s BSC, the fundamental indexes of the main business functions are normally already present. The concept of deployment though may be effectively used in a “lighter” form: the BSC’s indicators can be formally linked to the planning of operational actions and assigned to single managers. The triad strategy map-BSC-portfolio of initiatives does not only translate strategy into action, in an operational manner – as Kaplan and Norton stated – but, in SMEs, it already represents a powerful means for the alignment of functional responsibilities with strategic goals.
Analysis of competitive factors and success factors, as explained by the Value Curve and the company’s Mission;
Development of the strategy, formalised in the strategy map, expressed both in terms of strategic goals and in terms of performance indicators (Plan);
Realisation of the plan through the implementation of operational actions, job descriptions and other quality assurance documents (Do);
Monitoring and achievement of goals by use of the management dashboard and through operational meetings (Check);
Activation of actions aiming to improve (Act).
The BSC is at the centre of the strategy formation and review loop, since it supports the description of strategy by providing a clear model for the definition of strategic goals (the map) and requires concreteness in the identification of indexes/targets and of operational actions aiming to realise the targets. The BSC also represents the central point of control in the check-up phase dedicated to quarterly reviews; in addition, it is an important element that feeds the entrepreneurship loop because every middle manager is the “owner” of some indicators and is the reference for the operational actions connected with the achievement of some targets.
Moreover, the identification of actions is a bottom-up process: it is the single managers who propose – based on the improvement expectations of the indicators – solutions for the achievement of company goals. This is a key process that in Home Cucine is configured as an actual engine of change: at the beginning of 2009, an improvement solution featuring 26 Operational Actions with people in charge and well-defined time periods was started. The entrepreneurial loop is fed by the clear dissemination and explanation of the objectives and is “contained” in its potential centrifugal effect by the correlation between actions and effect on the performances contained in the management dashboard.
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